FIGURE 9.33 Revised East India Trade Game Dutch manager (revenue maximizer) Low Moderate High Low 600,600 550,687.5 500,750 British manager (revenue maximizer) Moderate 687.5,550 625,625 562.5,675 High 750,500 675,562.5 600,600
a. Consider the game faced by the British and Dutch managers when both are given contracts that compensate them with (1)/(2) of 1% of revenue. The strategic form game is shown. Find the Nash equilibria. b. Now consider the game between the British and Dutch shareholders as to what kind of contracts to give their managers. Assume that they simultaneously choose between a contract that gives the manager 1% of profit and one that gives him (1)/(2) of 1% of revenue. Assume, as before, that the shareholders’ payoff is profit (and we ignore the trivial amount that they pay to their managers). After a pair of contracts is selected, the two contracts are revealed to both managers, and the managers then choose between supply levels of low, moderate, and high. Find all SPNE.
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